What is a Second-to-Die Life Insurance Policy?

A second-to-die life plan can solve several problems in estate planning. Learn what is a second-to-die life insurance policy and how it works.

Married couples commonly choose a single coverage plan to protect their loved ones when they die. Choosing from individual or joint plans, this primary insurance is expected to cover any ensuing financial burden. 

In complex estate planning or unique life circumstances, your passing may incur unforeseen tax responsibilities or additional financial needs. In these cases, a supplemental option, a second-to-die life insurance policy, can provide essential benefits. Second-to-die life insurance, also called survivorship life insurance, pays out income-tax-free death benefits when both spouses have died.

A second-to-die life insurance policy can be advantageous in many cases, but it is not right for every couple. This article will explain second-to-die policies, their benefits, and situations in which it would be important to consider.

If you are exploring your life insurance options, discuss second-to-die policies with a trusted professional advisor. They will assess your specific circumstances and life insurance goals to provide the most high-value options available.

What is Second-to-Die Life Insurance?

Second-to-die insurance is a joint life insurance policy that insures two people, often a married couple. Like most insurance, it is available in either permanent or term policies. Permanent plans are the most common, as they tend to serve needs better while also accruing cash value.

Benefits of Second-to-Die Life Insurance

Estate Planning

The primary purpose of second-to-die life insurance is for estate planning with surviving children in mind. Many policies are designed to cover federal estate taxes, estate settlement expenses and state-specific transfer taxes when both parents pass. With this policy, survivors do not need to liquidate assets to cover costs, leaving the estate intact.

Survivorship life insurance is ideally positioned in an irrevocable life insurance trust (ILIT). Life insurance pays to the trust who disburses benefits to the heirs. This lowers estate taxes, as proceeds from the trust are not included in state or federal tax calculations.

Permanent Dependents

Having a second-to-die policy supports the ongoing care of a permanent dependent, a special needs beneficiary. In many cases, insurance holders will establish a special needs trust funded by a second-to-die life policy. This is beneficial because it adds permanence to the inheritance in an inexpensive way.

Qualification Requirements

An individual’s health factors into life insurance approval and premium costs. For those in poor health or at high risk, approval odds may be too low to make insurance possible.

Since second-to-die insurance only pays out when both spouses die, one’s bad health is less of a factor. Although they may be denied at an individual level, the other spouse’s good health can help both secure coverage. Underwriters are more lenient with these plans, and will often only look at the healthier individual in reviewing applications.

Insurance Costs

Along with qualification help, spouses in poor health can also avoid the lofty expense of high-risk individual insurance premiums. In most cases, a second-to-die policy costs far less than a single policy for a healthy individual.

If both spouses, regardless of health, cannot afford individual policies on their own, a second-to-die policy makes sense. It will be more affordable and provide some level of financial support for the next generation.

Cash Value

A secondary benefit of whole life insurance is the cash value accumulation, an investment perk that can provide growth. Part of your premium goes toward tax-deferred savings, which grows over time. With the earned funds, living account owners can leverage the value to take out loans or cover the cost of premiums.

Using a second-to-die policy as a cash value investment vehicle can aid your surviving spouse when you die. However, the yield is lower than for other insurance plans, so using second-to-die purely to build wealth is not recommended.

How Much Does Second-to-Die Life Insurance Cost?

Second-to-die life insurance policies are much cheaper than traditional insurance. The chances of both spouses dying in any given year are substantially lower than only one dying. From the insurer’s perspective, the lower likelihood of payouts means lower premium costs for the same amount of coverage.

To illustrate, let’s look at a husband and wife looking at permanent insurance plans. The husband has a probability of dying of 5 percent while the wife’s probability is 1 percent. The probability of both dying calculates by multiplying their individual probabilities together, resulting in 0.05 percent.

As evidenced, there is a significant disparity between the individual risk versus the second-to-die risk for the insurance provider. Let’s say a couple was funding a $1 million in life insurance through two individual $500,000 plans. Annual premiums for a $1 million second-to-die policy could be far lower than those for one individual $500,000 plan.

Is Second-to-Die Life Insurance Right for Me?

Second-to-die life insurance has its benefits when employed strategically. However, for the vast majority of couples, the downsides to second-to-die life insurance make traditional insurance more practical.

Drawbacks of Second-to-Die Life Insurance

Delayed Payout

The priority for most married individuals is taking care of their spouse when they die. Surviving spouses must weather the financial strain of lost income to support themselves and their children. Second-to-die life insurance does not pay out anything to the spouse when the other dies. 

The other spouse also assumes the full responsibility of paying the second-to-die policy on their own. This is unaffordable in many cases and the policy could lapse. The spouse could lose the policy, with only a portion of premiums or the plan’s cash value being refunded.

Divorce

If you have a second-to-die insurance policy in place with a spouse, the plan does not change if you divorce. The terms of the agreement and associated premiums are still intact, with default resulting in potentially large losses.

Parents can continue paying premiums but remarriage can make it hard to justify. Many parents don’t want to pay for death benefits that could ultimately end up with someone else’s family.

Cash Value

It may seem odd to have the cash value of a second-to-die plan as both a positive and a negative. It really is only noted as a benefit because it is a passive financial booster. Compared to many other plans, using a second-to-die plan as a cash accumulation mechanism is not favorable.

Due to the lower premiums, much less excess goes towards the cash value and savings grow slowly. You could potentially overfund your policy, but the rate of return could be lower than a traditional insurance plan. If you can afford to sufficiently overfund your premium, you can probably afford an individual life plan for better coverage.

Who Should Get a Second-to-Die Life Insurance Policy?

Wealthy Individuals

The largest benefit of second-to-die life insurance is in estate planning. Wealthy individuals who are concerned about their family’s inheritance being subject to estate tax use this often. For 2021, the estate tax applies to assets valued at over $11.7 million per individual and $23.4 million for married couples.

If your assets are above these thresholds, second-to-die insurance through an ILIT can save your heirs from extra costs. With a top rate of 37 percent, $1 million over the exemption amount can result in $370,000 in taxes. However, this is only the case for about 1 percent of estates, so most see no tax benefit from a second-to-die policy.

Couples With One in Poor Health

If you were denied coverage for health reasons, a joint policy can leverage your partner’s health to cover you. However, if group life insurance is available through employment, this is the recommended route for coverage. In these plans, an individual can be insured without meeting physical health standards.

Individual Plans are Too Expensive

Permanent policies are expensive but highly desirable for many life insurance shoppers. Age and health factors further raise prices on these policies. At a certain point, it can be too costly to cover a couple under two individual plans.

A second-to-die policy can have a larger death benefit but cost much less than a comparable permanent individual plan. It sometimes is even less than an individual term policy. If it falls within your goals, you pay lower premiums and retain a high death benefit for your heirs.

Special Needs Parents

Parents of a special needs child often set up a Special Needs Trust to provide ongoing financial security. A second-to-die policy is valuable in these situations as it provides the maximum benefit for the child. In establishing these trusts, it is critical to talk with an attorney to preserve Medicaid and other government benefits.

Work With an Experienced Life Insurance Professional

Second-to-die life insurance is extremely advantageous in many estate planning situations. To determine the best life insurance package for you, your spouse and your family, talk with a life insurance professional. Expert guidance will allow you to achieve maximum benefits for your inheritors while working within your means.
NextGen Life Insurance is dedicated to advising on life insurance options and providers that offer the most benefit. Get your free quote today or call us at 646-216-4199 to get started.